Australia | Feb 28 2013
-Solid interim result
-Competitor beat in retail
-Limited discounting a plus
-Loy Yang A robust contribution
By Eva Brocklehurst
Brokers gave AGL Energy ((AGK)) the thumbs up after the interim results. The electricity and gas utility impressed with stable earnings and margin improvement as well as customer wins.
Retail provided the best outcome for several brokers with AGL clearly in front of competitors, gaining customers and maintaining margins. AGL has stated it will cease the door knocking customer acquisition strategy in NSW and Victoria, believing a better margin outcome is obtained through re-investing in winning back customers. Credit Suisse is not so sure and will be looking to confirm the margin outcome has been maintained in the second half.
Macquarie highlighted the gross profit increase of 18% in electricity against an average price increase of 22% per megawatt hour and revenue increase of 26%. The broker notes only a limited amount of the increase was given away through discounting, despite the intense competition in the market place. The headline result for retail appeared weak but this reflected timing of carbon price billing and changes to transfer pricing. Credit Suisse expects this will be recovered with a weighting to the second half.
On the merchant side, brokers welcomed the robust contribution from AGL's recently acquired Loy Yang A power station. Credit Suisse estimates Loy Yang A contributed around $182m to the result and this was a respectable outcome given the hedge book pressures experienced by other retailers. On the matter of the hedge book, Deutsche Bank finds the company has learned from past mistakes. Recent high electricity prices in Queensland from weather events and transmission constraints have affected profitability across the sector but AGL's exposure is muted. The company anticipates an adverse impact of around $10m (pre-tax) which highlights the sound positioning of the electricity hedge book. Deutsche Bank noted AGL suffered a profit downgrade in FY11 from similar issues with Cyclone Yasi and has adjusted its hedge book accordingly.
AGL's gas contracting position is a source of concern for Deutsche Bank. The contract position (from the Cooper Basin and offshore Victorian contracts) falls from around 250PJ to 80PJ across 2017-18. Increased upstream activity can mitigate this but, with increased regulation of the CSG industry, the potential exposure to higher third party gas prices is a source of risk, the broker maintains. For Credit Suisse too this is a concern, noting management is relying on this gas shortfall to come from contracts with Victorian producers given the constraints in NSW.
For Macquarie, uncertainty will come later in FY16 when soft carbon and non-carbon prices weaken earnings. Here, gas will be the key to to profit growth as the underlying price increases. In the meantime, gas is a frustrating business. The NSW CSG decision process remains fraught. Macquarie notes the Gloucester project will now take one more year than was factored in and, while only minor additional approvals are needed, this is a sensitive issue and there is risk with further delays.
The NSW zoning plans, if implemented, mean AGL's Hunter and Camden North projects would not proceed. Gloucester has some wells within 2km of residences but will go ahead as approvals have been granted at both state and federal levels. The company has flagged a writedown of around $250 million if the NSW government's proposal to restrict CSG activity goes ahead. Macquarie notes AGL expects to keep the licences and, if CSG is demonstrated to be safe, the projects could resume. Most brokers attach limited value to the gas portfolio so this uncertainty has not impacted the share price severely to date.
The interim dividend of 30c came through as most expected. Management highlighted a progressive policy which should produce steady growth but Macquarie notes, whilst in the investment phase in merchant and upstream gas, there was no consideration of a step change in the dividend. Credit Suisse found the dividend below its expected 31c but the cash flow profile should support upside in the second half and the broker forecasts a final dividend of 32c.
On the FNArena database the consensus dividend yield on FY14 forecasts it is 4.2%. The price targets range from $15.70 to $18.00. Deutsche Bank has the top target price and a Buy rating, finding the stock a strong performer in a challenging environment. The consensus target price is $16.66, giving 4.8% upside to yesterday's closing share price. There are no Sell ratings for AGL on the database just three Hold and four Buy, underpinning the stock's solid characteristics.
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